> Countries that we normally think of as very well off, such as Denmark, Sweden and the Netherlands are among the most indebted people on earth in terms of household debt to income. They can't afford much higher interest rates at all,

That's a little mixed up. The effect of inflation is to reduce the effective size of debt, not increase it. So if you owe someone $500US(which has a barter value of ~100 lattes), and a burst of inflation hits the dollar such that the price of a latte doubles, then you only need to pay back 50 lattes to the lender. You win!

Obviously it's the holder of the debt that ends up on the hook for this. Which is why interest rates of lots of debt get indexed in some way to adjust with inflation (or things like the prime rate, which itself tends to track inflation). So the net effect is complicated. But on the whole it's the lenders of money who stand to lose the most when inflation rises. Those who have borrowed come out ahead, on average.

So the net effect of inflation (assuming no second order effect like a global crash, yada yada yada) is to effect a wealth transfer from the lenders of money (e.g. banks and institutional investors) to the borrowers of money (consumers and governments).

There are some very smart people who think this isn't necessarily a bad thing at all.

> Those who have borrowed come out ahead, on average.

I once stayed in a hotel room where the shower had the heat I wanted on average, it was horrible.

But when it comes to real estate, as long as you can afford the increase in interest you'll probably be fine. My concern, here in Sweden at least, is that given the current real estate prices here, I can't see how people with average incomes can afford a more normal interest rate like 4-5%.

In America, most people get fixed-rate 30 year mortgages, so if you buy now, even if interest rates rise subsequently, your monthly payment doesn't change for the next 30 years.

That is not quite what he is saying. People in the big cities in Scandinavia have so much debt and variable interest loans that they will be hit hard by an increase in interest. It'll eat away disposable income and in general lower economic activity.

My debt in the house has fix interest for 5 year periods, so if the interest at the start of next period is higher, it's going to cost me disposable income.

In Chile mortgages are denominated in a separate currency UF which is inflation adjusted. So the wealth transfer goes the loan holder.

But if the borrowed can make the payments right?

Because in Canada people are often taking the max amount banks approve.

"Collapse of the housing market" is a funny way to talk about affordable housing. It assumes that everyone already owns a house and will have a problem if / when the value drops below the remaining debt.

In the US around 65% of households own their home. A collapse of the housing market would be catastrophic for their finances. I'm sure this is true of other countries as well.

You might argue that many people don't actually own their home since they still have a large mortgage, but this just makes the situation worse: now you have a mortgage that's more than your house is worth.

It wouldn't make any difference to those who own their homes outright, unless they were planning on trading up, in which case is it would be a positive, or down, a negative. Those who overleveraged could indeed find themselves in difficulty, however I fully expect they will get bailed out by the very people they priced out of the market by overbidding.

Well, if they were planning on trading up, now the home they were going to sell to purchase a new home is worth less too, so it comes out in the wash. In either case, it makes their net worth look worse on paper.

funny?

when housing markets collapse, the economy goes down and people loose jobs. when you dont have a job, you cant buy a house. one of the many reasons why housing market collapses are not refered to as affordable housing.

don't need to look further than 2007-2009 to see an example of this.

You can see here that home ownership did not go up: https://en.wikipedia.org/wiki/Home-ownership_in_the_United_S...

> when housing markets collapse, the economy goes down and people loose jobs.

I believe the causality goes the other way around. Economy goes down, people lose jobs and then the housing market collapses. It's funny to keep a bubble inflated to protect people from their mistakes.

People always get overleveraged (encouraged by the government and the banking sector) to buy real estate when the economy is doing fine, what else could one expect to happen when things go south?

it does go both ways, but drops in housing price also cause the economy to go down. like a lot. This is already a well established fact

I tend to have the same outlook, i.e. the US govt will be hard pressed to "afford" high interest rates, but I struggle with your statement about QE. QE does not reduce inflation - QE,i.e. printing money to buy debt that is not productive - would devalue a currency and increase inflation. QE is only made possible by deflationary pressures existing elsewhere. Such as Japans shrinking population and lack of productivity growth.

Inflation is how a debt load becomes affordable again.

Is that not correct?

> As of a year ago, in total around 39% of all outstanding Australian residential loan balances were interest only. [1] For those that recall the US real-estate bubble, that's a terrifying figure; the US interest-only share of the market during the crazy years of the real-estate bubble was single digits (5-8%). Australia is currently taking action to try to counter this, which is rocking their market presently. [2]

At least for myself, I have an interest only loan; but it comes with an offset account. In a day-to-day sense it's not very different to a normal mortgage with free redraws. I think this gets confused when comparing stats across countries, as offset accounts in the USA don't seem to really exist (while they are common in Australia).

I'd like to give my thoughts on unsustainable interest rates in Canada. Living here, I see it as yes, a raise in interest would be catastrophic for many home owners and their mortgage payments. But we are tied to USA's Fed. If they increase the rate, and we do not, our dollar will plummet in USD CAD terms. So in my eyes, it is a trade of between devaluing the CAD, thus every Canadian absorbing the blow, or home owners taking the interest rate hit. I am not sure which is the best outcome :)

edit to clarify why CAD will drop, is because CAD will be given up at the lower rate for USD which offers higher rate.

Why does loaded up with debt imply interest rates will be low? Most debt is fixed-rate and not inflation-adjusted so there is a strong incentive to drive up inflation and interest rate with so much outstanding debt. This may fail in which case you get a deflationary collapse, but a priori it's not clear at all which direction things go.

If the stagflation era of the 70's is any guide, the world will undergo a significant bout of inflation to clear the plate and the holders of USD (playing the role that gold played then) will be wiped out and it will no longer be the reserve currency.

> Why does loaded up with debt imply interest rates will be low?

adventured seems to think that "can't afford interest rates to rise sharply" implies "therefore interest rates won't rise sharply". That seems a bit naive. (Though in fact the Fed can make that happen, with QE. But the results could be pretty disastrous in non-interest ways.)

However, there is a bit of a negative feedback loop. Interest rates rising hurt those who owe variable-interest debt. (Side note - if you have a variable-rate mortgage, you should seriously look at refinancing with a fixed-rate one.) Those who are hurt in this way spend less. This slows down the growth of the economy, which slows the rise of interest rates.

> If the stagflation era of the 70's is any guide, the world will undergo a significant bout of inflation to clear the plate...

That seems likely. Those who owe variable-rate debt will get crushed by this, though. Those who owe fixed-rate debt will be relieved over time.

> ... and the holders of USD... will be wiped out and it will no longer be the reserve currency.

Depends on whether the Euro and the Yuan hold up better than the USD. I find it hard to believe that China will let the Yuan be significantly more solid than the USD; it has found it commercially helpful to have the Yuan be weak. The Euro might be the winner, or it might become as weak as everyone else. If it's the latter, then the USD likely won't be very significantly hurt - it has the advantage of incumbency, and if it's no worse than everyone else, it will be fine.

> USD (playing the role that gold played then)

Gold didn't play that role in the 1970s - at least not in the second half. Once the US let the price of gold float, gold was a rocket. It went from $35 to $200, dropped back to $100, and then went up to $800 (though this started in the 1970s, I don't remember what year it hit $800). Those holding gold were very much not wiped out in the 1970s!

> Most debt is fixed-rate

While technically true, the term of the loan matters. The government (and most companies that issue bonds) have revolving debt. I.e. they are continuously issuing new debt as existing debt expires. So while inflation theoretically makes your existing debt cheaper, it might not matter that much if you still need to rely on the debt markets in order to fund operations.

Isn't QE just injecting more money into the system? How can that not result in inflation, eventually and if done excessively? It's the classic "more money chasing fewer goods." It's not just where the fed pegs the discount rate that drives inflation, it's also the money supply.

...and if inflation goes up, so does the cost of borrowing, unless banks are planning on loaning people money at below the inflation rate. There's no free lunch, unfortunately.

I suppose if the the additional demand instantly translates to near immediate provision of supply? Most manufactured goods would fit in that category nowadays?

Only things like housing do not as they can't be easily provisioned to meet demand as quickly.

Correct, in that if supply increases you've either increased productivity, or the workforce. It cannot come on line otherwise.

I think it generally lags, and does not quite close the gap, outside of other deflationary pressures being present.

>The Fed will go into perpetual QE mode, as Japan has, to guarantee that.

And many other countries as well.

The very few ones who can "afford" high rates are, ironically, the frontier markets. Gulf kingdoms, *stans, banana republics, Vietnam, and much of Africa. And yes, ... Germany.

Frontier market bonds has never looked so attractive in my lifetime.

Germany is joining the club at the moment with a real estate bubble.

I hope so as I just signed up for a mortgage after years of waiting for prices to drop.

Do you know how Poland is doing compared to the others you mentioned?